When investing, it’s critical that you understand what it is you’re buying. I love talking to people about what we do when we buy property and watching the look on their face. I can see the internal calculus going on in their head trying to make sense of it and how it would work. It gets really interesting when we tell them about the types of properties that we buy. The average person just doesn’t get it.
Here’s why. They don’t understand the key investing questions that we ask ourselves when we look at a deal. Better yet, they may just not know the right questions. Isn’t that often the case when it comes to getting what you want out of life? Successful people ask better questions and as a result, they get better answers. Thank you Tony Robbins for drilling that into my head. If I ever meet you in person, that’s the one thing I’ll tell you that you’ve helped me with; asking better questions.
Anyway, here are the key questions and how we look at them
1. Why are we investing in this?
Are we buying this to flip? Are we buying it to fix and flip? Are we buying this to hold a note? Why are we getting this property. In other words, I have to think with the end in mind and work my way backwards on every deal. If I can’t flip it, can I hold it and create cash-flow?
2. How much work will this investment require?
How much time will it take for me to handle this deal from start to finish? Time is money right? So if we’re concerned about velocity of capital, we have to think about how we would price it to get it off the books quickly. We have to consider if there’s a market for it in that area, and the other needs that go into moving the property. We try to delegate as much as we can, but every property needs something.
3. Will it be a win for us and for our investors / buyers?
We look at deals to make sure everyone wins on the deal. Do we win as a company? Do our buyers win when they get the deal? Do the people who buy on a note win? Do they get a property cheaper than market rents? Do they get a project they can handle? If you set up your investment to help everyone win, I think that pays dividends you cannot even count.
4. What are the risks?
Every investment comes with risk. However, my mentor said something to me once that has stuck with me in every real estate deal I’ve done. “Price cures all”. If you buy a deal at the right price, then your risk is very, very low. Think about the Great Recession. So many people, including myself, bought at the worst time. So, if you’re following the crowd on deals, let me just tell you, at some point, you will get burned. Take calculated risk and if your model tells you the most you’ll pay for a property is ‘X’. Then you had better not pay ‘Y’ because you’ll likely end up regretting it.
5. What are the rewards?
What is the upside potential of a deal? Fortunately, we look for multiple exit strategies, so we have a good idea about what we’ll end up with on a deal. However, the market really determines what you can get out of a deal so you’ve got to have a good pulse of what the upside potential is before laying out money on an investment. Know how to look at comps. Talk to your network in the area. Cold call investors, management companies and realtors. To fully understand the impact of your network, go back our post on The Power of Networking
6. Can we make it a passive investment?
This is critical and always my favorite question to ask on anything that we buy. Can we make this a deal that creates passive income? Financial freedom is totally tied to the amount of income you have coming in. I cannot be free, if I trade time for money. My goal is to trade the money I have for income in my investments. Once your passive income exceeds your monthly obligations, that’s the critical mass of freedom baby! I have my eye on that number every single day and it’s measured to the penny.
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